Lockheed Martin Purchase of Insys - Start of a Gold Rush?

Even the doldrum days of August produced at least one surprise, this in the shape of Lockheed Martin's purchase of Insys, the management-owned, mid-sized UK defence company.

Details of the price paid were not disclosed, but since Insys reported 2004 a post-tax profit of £2.7 million, on sales of £47-million, the purchase shouldn't exactly burden LM with too much cash drain or debt!

Insys makes a good fit for LM, a point harped on heavily in the press release. Insys is active in consultancy areas where LM has interests and has systems integration expertise, also in areas in which LM has interest and in-house expertise. And Insys has a considerable history of working with LM on Apache munitions and integration of munitions, MLRS and GMLRS, GBAD, Soothsayer land EW system as prime examples. It might even be said that LM's move was long overdue.

So, 2005 has already been a busy M&A year for LM in the UK. In February, the purchase of Stasys, another small UK defence consultancy business was finalised, and the US company has reiterated that it has long-term plans to acquire niche small and medium sized businesses wherever it sees them as good fits for its core.

But why has LM decided to expand in the UK, and why now? Prior to its last two purchases, LM employed about 6–700 people in Britain, yet had UK sales of some $1-billion annually, 25 per cent of its entire-non-US turnover. Many have observed that LM has done extremely well on the back of a small footprint.

And those of a vicious frame of mind tended to observe that out of the 500 or so employed at Havant on systems integration, not so many had English accents. In which case LM has succeeded in penetrating the UK market without needing to go to the expense of building up a substantial industrial footprint in-country.

Two thoughts about what made LM decide to expand in the UK are:

1. That LM's strategy has done it well enough so far – but to increase its UK defence market presence an expansion of its industrial footprint was needed.

2. That the UK might well begin to become less open in the next few years, partly as a result of the industrial policy review. Therefore LM has to impress a wider UK footprint to avoid being shut out of future business.

So what now? Is the Insys deal LM's ultimate acquisition in the UK? Or is it eyeing other targets? Is an industrial footprint of some 1500–1800 sufficient to provide political clout when it comes to future contracts and business? There is thought to be little in either Stasys or Insys to cause integration problems for LM overall – this is not BAe/Marconi merger – so LM could forge ahead if it believes it's worth it.

And what of other players? One comment on Boeing's semi-withdrawal from the UK Military Flying Training System programme was that it seemed strange at a time when the company has reportedly expressed a desire to expand – needs to expand – its UK defence presence, that it should slink away from a project that could enable it to do just that.

And EADS has said that it aims to expand its British defence business – worth some £400-million already and set to grow as programmes such as the Future Strategic Tanker Aircraft come on stream – and has certainly not rejected acquisitions as a means of doing so.

General Dynamics has been the most acquisitive American company overseas, with major deals in four European countries. Might GD want to ensure that its own UK footprint is enlarged while it can find suitable targets and while it is still politically acceptable?

So will LM's move on Insys be the catalyst for others to decide to lose their M&A wallflower status and to buy whatever they can find in the UK? And no mention has been made of incumbents such as Thales, Finmeccanica, or even BAES. Will they fight actively if a bidding and buying war starts? It is a reasonable assumption that none of these three biggest players in the UK defence market would be willing to see their share nibbled away by pretenders.

And that ever-knotty question – what to buy? Well, the selection isn't that wide for firms looking to widen a large-ish UK footprint. The two best-looking choices at the upper end of the spectrum are seen by Defence Analysis as:

• Ultra Electronics
• VT Group

Both offer good ranges of activity, although VYT would be of most interest to a company with a focus either on naval industry or on support – but the creation of a UK "ShipCo" could prompt a demerger of the VT Group's naval business. Both companies would have similar market capitalisation, at around £500-million.

But looking at smaller, perhaps more niche players, what other options are open?

• Logica CMG: £1.65-billion turnover, £400-million or so in defence. Well linked with Net-Enabled Capability programmes. Good for LM, Boeing, Raytheon, Northrop Grumman or EADS.

• Vega Group: £53-million turnover. Specialised IT/electronic assessment integration firm, well tied in with UK government.

• W S Atkins: £950-million turnover, c£150–200-million defence/aerospace business? FRES attractive for Boeing or GD.

• Small specialist engineering companies – William Cook Defence, David Brown Engineering – niche, but possibilities for land systems specialists such as GD. It looks as if it will be an interesting tail end of the year if a bidding war does break out for some of the smaller UK small and mid-sized defence companies.

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• EADS and Thales
• Middle East Market
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